Ordinary Payroll Coverage Can Be Extraordinarily Tricky- Understanding Business Interruption Claims

When measuring a business income loss, a company can treat all payroll and benefits (if directly related to payroll, i.e., FICA, worker’s compensation, etc.) as “continuing expenses” in its accounting worksheet as defined in CP 00 30 10 (Business Income and Extra Expense Coverage Form). If the policy has an Ordinary Payroll Exclusion or Limitation, the company can maintain all non-hourly payroll as a continuing expense in the worksheet and submit the payroll for the hourly employees under an additional coverage endorsement, which is purchased for a specific number of days (e.g., 30, 60, 90, and up to 365) to be recovered within the Period of Restoration.

The Ordinary Payroll Exclusion or Limitation form CP 15 10 06 07 defines “ordinary payroll expenses” as "payroll expenses for all your employees except: officers; executives; department managers; employees under contract; and additional exemptions, shown in the schedule as: job classifications; or employees."

Examples from the National Underwriter FC&S Bulletins are illustrative of this coverage situation:

Ordinary Payroll Limitation Described

March 12, 2012

In the typical ISO business income form under ordinary payroll limitation it states in part, "Ordinary payroll is limited to a specified number of days. The number of days may be used in two separate periods during the ‘period of restoration’." What does the last sentence really mean?

Is this sentence there to clarify that the days do not have to be consecutive? I cannot think of a good example of where this is really in play other than if the period of restoration is broken up into two parts and the ordinary payroll from the same occurrence is somehow broken up into two parts that the two separate periods during the period of restoration could apply that way.

Thoughts? Do you have a good example of how this wording is applied or why it is included here?

Texas Subscriber

The current ISO form no longer contains an ordinary payroll limitation. An ordinary payroll limitation or exclusion endorsement can be added via CP 15 10. That form specifically states, "The number of days need not be consecutive but must fall within the ‘period of restoration.’" So, the implication is that the wording you quote means that the days do not need to be consecutive but with the restriction that the ordinary payroll can be broken into only two separate periods (as opposed to any number of periods that the CP 15 10 allows).

An example of when this provision may come into play is if, during the period of restoration, workers are needed a few days at a time to get things back up and running, but they are still not on the job full time. So, perhaps warehouse workers are brought in to take inventory one week, then a few weeks later IT personnel are called in to set up computer equipment. The ordinary payroll for those periods could be covered by the ordinary payroll limitation.

Business Income and Ordinary Payroll

Q

A client I handle purchased business income coverage through ISO form CP 00 30. Endorsement CP 15 10 was attached to limit coverage for ordinary payroll to six months. This insured suffered a covered loss and was partially shut down for nine months. I believe he should be allowed to recover ordinary payroll expenses during the entire nine months because the company was only partially shut down.

The insurance company has disallowed ordinary payroll expenses past the six-month time frame. Is that correct?

Ohio Subscriber

A

The standard business income form CP 00 30 provides coverage for the actual loss of business income during the "period of restoration" which, in this case, would be nine months. The form defines business income as net income that would have been earned or incurred had the loss not happened and continuing normal operating expenses incurred, including payroll. Endorsement CP 15 10 limits coverage for ordinary payroll to the period stated on the endorsement.

Since this insured limited ordinary payroll coverage with the endorsement to six months, only the amount accrued during the six-month period of the shutdown can be included in the loss settlement.”